Episode 178 | Will 50 year mortgages become a reality? | Martin North, DFA | Insights from Digital Finance Analytics

The impending market crash never came but what could cause the next?
In this episode, we welcome back Martin North, Founder of Digital Finance Analytics (DFA). DFA surveys thousands of Australian families to gauge key consumer metrics, which have been crucial in highlighting areas of concern within debt and property prices. This is Martin’s third appearance on the Podcast, previously he has shared bearish views on the property market but maybe in this episode, he has had a change in heart?

The economist’s who cried wolf will be known for their false property market crash predictions. It was meant to be peak Covid cases, the tightening of restrictions, the September cliff and in March of 2021 end of job seeker.

Here we are in May, the property market has only broken records due to a variety of factors resulting in a lack of quality supply and overflowing demand that has brought new faces into neighbouring suburbs. But what’s next? Will consumers continue to go to auction on a Saturday until they settle, or will they give up waiting for a market crash that may never happen? Alternatively, have consumers bitten off more debt than they can chew, and will a potential cash rate increase bring down property prices to all-time lows?

RELEVANT EPISODES:
Episode 177 | Australia’s Economic Recovery | Carlos Cacho, Jaden Group Australia
Episode 143 | Postcode Analysis: What properties are outperforming the market | Martin North
Episode 123 | To buy, or not to buy: that is the question | Martin North

GUEST LINKS:
https://www.digitalfinanceanalytics.com/

 HOST LINKS:
Looking for a Sydney Buyers Agent? www.gooddeeds.com.au
Work with Veronica: https://linktr.ee/veronicamorgan

Looking for a Mortgage Broker? www.wealthful.com.au
Work with Chris: hello@wealthful.com.au

Send in your questions to: questions@theelephantintheroom.com.au

EPISODE TRANSCRIPT:
Please note that this has been transcribed by half-human-half-robot, so brace yourself for typos and the odd bit of weirdness…
This episode was recorded in May 2021.

Veronica Morgan: There's very little talk of a crash when property markets are booming and the longer prices run for the shorter our memory seem to get. Are there warning signs that we're all missing out on in this frenzy?

Veronica Morgan: Welcome to the elephant in the room. This is the podcast where we love to talk about the big things in property that never usually get talked about. I'm Veronica Morgan, real estate agent buyer's agent co-host of Foxtel's location, location, location, Australia, and author of auction ready.

Chris Bates: And I'm Chris Bates mortgage broker. Before we get started, I need to let you know that nothing we say on here can be taken as personal advice. We always recommend you engage in the services of a professional.

Veronica Morgan: Don't forget that you can access the transcript for this episode on the website, as well as download our free fall or forecast report, which experts can you trust to get it right? The elephant in the room.com did I? You,

Veronica Morgan: What happened to the job caper cliff, where his pain being filled amongst property owners in mid the haze of rising prices today, we've coaxed Martin north out of the bear cave, and we're keen to find out his perspective on the surprisingly buoyant property market we're experiencing at the moment for those of you who haven't yet come across Martin. He is the founder of digital finance analytics, a boutique research analysis and consulting firm who specializes in offering insights into the dynamics of the mortgage lending savings payments and superannuation sectors were spoken with Martin in two episodes previously. And if you like what you hear today, go back and check out one 23 and one 43. Thank you so much for joining us again today, Martin. Great to see you. Hello,

Martin North: And boy things change don't they? But look, just to be clear, I'm not in a bad cave, I'm in a realist cave.

Veronica Morgan: We did establish that the first time we met

Chris Bates: Probably talking about sort of the bear versus Martin. I mean, I mean, some people would call you a realist. Some probably would say that over the years, you've thought that there was going to be big crashes to the market. I mean, how does it sort of feel when you see the market sort of doing what it's doing at the moment? I mean, does he have, do you feel comfortable or does it frustrate you? I mean what's

Martin North: So there's two perspectives. The first perspective is if you look long-term property is very significantly overvalued relative to any of the metrics that you'd care to choose GDP, et cetera. After the only one where you could argue that it's a little bit more affordable is because rates are so low and therefore from pure affordability, not repaying the capital, but fewer affordability and servicing the mortgage repayments. It's a little bit where it was. Right. But my frustration is that, you know, we have, we've dug ourselves this sort of strategic hole that this has been going on for years and years and years. And every time we get another problem, basically the answer is, well, let's just lend some more mortgages to people, let them go buy houses, let the prices go up because that will increase the wealth effect. The trouble is, this is so artificial now is to be scary.

Martin North: That's the first point, the second days. And of course my scenario is currently are suggesting prices will go higher. So be clear, you know, in my central scenario, now prices will go hard will go higher ahead. That is because of the massive amount of government stimulus and the very low interest rates. And in fact, I've had my central scenario for the last nine months, suggesting prices would go higher. So now let's get that on the table when people say, oh yeah, we say that prices go down. Now. I said, they'd go up, but tactically, they're going up, but you can understand why they're going up. It's all the government stimulus all the government, you know, throwing money at first time buyers and you know, the home builder and stuff. And the fact that banks are now lending more freely than they were. So we have got more people with bigger mortgages getting into the market, rising prices.

Martin North: Now the final thing to say here, but it's not uniform, right? So if you look carefully at where prices are booming, it's houses standalone plots. It's not necessarily in the high rise sector, particularly if you're looking in the, the suburban ring. And so once again, we need to be very careful and go granular. And you know, one of my key sayings is go granular. You can't talk generically about the property market. There is not a property market. There are millions and millions of little property markets with different dynamics. And so it's really important to what's going on. And the trouble is some people have sort of been swept up with our renewals going up. It's going to be massive. We've got to buy now when in fact that may not necessarily be the right strategy. So people should still be cautious and careful do the analysis, do the detail work to understand what's going on on the ground, where you're looking.

Veronica Morgan: Yeah, we can probably wrap it up then and just say, that's it for this episode. But I do have something that's interesting to me. I'm starting to get people saying to me, oh, well, I'm just particularly in the first home buyer space, I'm going to go to where the opportunities are and the opportunities are in inner city apartments. And you know, where there's been over supply and people are finding it hard to sell there's opportunity there because they still have this idea. You can't go wrong in property. And I'm like, oh God, please don't do it. Please don't do it.

Martin North: I was doing some work. You know, I have my one-on-one conversations with people where I actually go into their individual suburb and look in detail at what's gone on, right? And I've had four or five with people in the high-rise sector or looking at the high rise sector. And when I reveal what has actually gone on in the high rise sector in that inner, suburban ring, particularly new or newly constructed or relatively newly constructed, you know, they are really horrified as to how much prices have fallen. And then I start talking about the rise in strata fees. And then I start talking about flammable clubbing and poor quality construction. And you know, a lot of people are saying, oh yeah, I can see now why prices are on the way down. Then I talk about the fact that property investors holding those high rise properties are losing money on a cashflow basis because the rentals allow them, they were.

Martin North: And that's the point of course, that people never actually look at the net rental income. They always look at the net rental return. I should say, they look at the gross return. So in other words, the price to the theoretical rental, which is meaningless rentals are down. So, so actually a lot of people conclude, well, you know, maybe now's the time to think of selling those high rise rather than buying. And unfortunately of course the new construction sector is, is, is trying to hang deals out there and promise to underwrite rentals for the first three years or something. But that really, you know, the mass don't work very well. So I think people should be ultra ultra cautious with regard to the high rise sector. And you know, my view is there are very few real good deals there.

Chris Bates: Absolutely. I mean, the interesting, can you give us a bit of an example of just a case study, I guess of you saying maybe in Sydney or Brisbane where you've seen price falls, you've also seen Stratta process Roz if you give me, because I think the Strada price rising is a really interesting point because, you know, when they purchased that and they thought, oh, we can afford a thousand dollars a quarter, but if that's now $3,000 a quarter, Hey, they might not be able to afford it. But also if they tried to sell it and somebody else looks at it and says, oh God, that's expensive strata that I'm not going to look at buying that. That's what also can cause prices of that particular building to fall. So I've got an example is like of episode, exactly dress, but you know, some type of properties you've seen, my stride has gone up. Yeah.

Martin North: So there, I was talking to one of my one-to-one followers and they've got to six properties in a Redfin high rise, right. In one building or one complex in one complex. Right. And so my first observation was concentration risk. Now of course, a lot of those were actually targeted at students, right. And sh you know, basically short-term rentals try to Airbnb that didn't work very well. Got relatively poor quality occupancy through that. And then of course, all the students disappeared. So of those six, two are currently let, and they are getting 30% less than the last year for our vacant, right. And no prospect at the moment until the borders open, are those properties basically being led right now, they're all four available on Airbnb. And they've had no takers in the last four months, right? The strata costs there have gone up in the last year by more than 20%.

Martin North: And the reason for that is this building was about 10 years old. And they've got a few structural cracks that need attending. They've got some issues with water ingress on the balconies flat slabs that were cast with, you know, not the proper water prevention system. And of course I mentioned the water comes through. So they've seen the Strada prices rise, but they've also got some flammable cladding issues as well. And now there's a discussion about who's going to pay for the flammable cladding. Of course, the builders disappeared beyond the warranty period. So basically the question now is what do you do? Do you try and sort of get out, do you try and start selling? And of course you can't put four or six products in the market at the same time, because that'll just depress the prices. So, so the strategy that he was following was drip feeding into the market.

Martin North: First one went on the market, not one single visit. The pricing, you know, is, is low than what he paid for it. So the classic example where the capital value is going down, or other than that, where the costs of running the property are going through the roof. He's fortunate because he's got some other houses as other investment properties in regional areas, and they're doing a lot better, but net net, this is a huge running sore without an escape route. You know, that's a real on the ground Cosa. And I should say, I did actually get his permission to relay the story before I actually told it.

Chris Bates: And I mean, I guess the real value of that property is obviously a lot lower than they think it is because, you know, when they try to, at least the property, they would have listed it for a price without a single viewing. It's not actually worth that, obviously in this current market. And so this is a painful thing for people to really realize is that if they actually had to sell it right today and actually get a deal done, what would be the price of that? I imagine it'd be a lot lower than they think it's worth. It's what they think it's worth is probably what it was worth in 2019 or 2018. But what is worth in 2021 with no borders shot is obviously dramatically less. And so people hold onto the past, I guess and want to hold on to that feeling or to go back to like it was in 29 that

Martin North: They bought in 2017, right. Which, which was the perfect peak prices, prices then slipped a 15 to 18% since then. And are now about 22% down from that peak. There's been hardly any upturn over the last few months. Right. And the question of course is, well, do you sort of hang on with it by your fingernails and hope that things turn around the borders open and then the students come back or do you try and actually, you know, start an exit strategy. And that was really the basis of the conversation, which was, well, just think about this. You know, you are one of a number of people in the area with a similar problem. You're not the only one we know that the vacancy rates in the area are somewhere between 15 and 18%. Right. We also know that the proportion of students coming back from international sources will stay low for at least the next few months, probably a year or so.

Martin North: And we also know that there's a lot of stuff on the market already and more coming on and the asking prices will have to be significantly lower. So the question becomes then, well, do I take the hit, you know, and, and, and walk away, do I try and find a way to muddle through, you know, Airbnb and try and just get somebody in a really low rent and hope that it turns around, but they've already lost that capital. And the point I made I made in the conversation was, and the opportunity costs, right? Because the fact that you're single that money and, you know, sometime back up at the last peak means that you are actually literally leaking money day in, day out. And he hadn't actually done the maths. So we sat down and did, and did the calculation, right. Which basically said, well, let's look at the cashflow first.

Martin North: So what's the money in, what's the money out. What's Australia, what's the mortgage repayments, et cetera, et cetera, of course, mortgage rates have gone down. So that, that helped a bit, but there are other costs there. So underwater on a net cashflow basis. And then we said, well, let's look at the capital losses and the capital losses, even after taxes. Significant. Now that basically suggests that this particular case study is going to find it very, very tough to turn this around anytime soon. And I don't think it's just a one-off case study. You know, my conversations suggests that this is actually a relatively similar conversation to ones I've had in Melbourne. And I've actually had some similar ones in Brisbane to Brisbane is best, slightly better. The returns are slightly better, but Sydney and Melbourne, those high rise in a suburban areas in particular, they are really, really, I think, you know, areas of concern and there is no simple exit strategy.

Martin North: They basically bought the wrong property, the wrong strategy at the wrong time. And frankly putting six, you know, six in the same block whilst he got a significant discount when they did it. And you know, it was very convenient and, you know, you can all understand why it seems obvious at the time. You know, I always say to people, if you're going to think about investing in property, spread the risks, you know, be careful about what you buy, where you buy. Now, interestingly, give you another case study up in Brisbane. I spoke to somebody there, who's got an older style, low rise unit bought at the same time, 2017, right? And in fact, a similar amount of money was paid. So it's a, it's a larger property. That one is actually doing much better because effectively rents have actually not fallen. And there's significant demand.

Martin North: It's convenient for the city center, et cetera, et cetera. But that's an older style, low rise, the strata fees there have hardly moved up over the last three years. They don't have any flammable cladding issues. They don't have any issues with structural defects, other than normal stage repair. They're going to have to pay for a new roof at some point, but not immediately. That's a completely different proposition. And if you do the calculations on that, then sure. They've lost a little bit since 2017, not a lot, a little bit, but in terms of cashflow it's positive. And so that is not a situation which you know, people should be concerned about. So you can, if you buy the right property with the right sort of mathematics attached to it, you can make it work. But it's a really good object object lesson about what you should be thinking about and where you should be thinking about makes a huge amount of difference

Veronica Morgan: With positive cash flow is that it masks often a capital problem. And, you know, even that Brisbane one, yes, it might not be hurting in a cashflow sense, but it might still not be doing its job as an investment. And I guess with the poor Redfern person, who's bought six of them for God's sake. You know? And it's like the flammable cladding, for instance, even in 2017 potentially was a discoverable. It like at the moment you've got this recency bias and everyone thinks you can't go wrong. You know? And so this person's obviously thought you can't go wrong and students must be a great bet. Why you, you know, why are you going buy six of them? And there's been a whole heap of overconfidence bias there that's led them to make these decisions. And now obviously, you know, they've suffered their punch drunk. I would think this, these people, I mean, they've, they've really hit, it'd been it from every which way. So

Martin North: We'll just pick up one point. You said that flammable cladding was discoverable. Now that's a very

Veronica Morgan: Potentially, I'm not a hundred percent certain on the dates on that. That's why I'm saying that.

Martin North: But my, my observation is it's extremely hard for prospective buyers, even now to know whether there are flammable planning issues. Many of the strata companies are not very transparent about their particular situation. Even if you ask hard questions. And of course, a lot of people, when they go buy a unit, they look around the unit and look at the sort of the shiny taps and think, oh, it looks pretty good. They don't ever walk out down to the common areas and look down at the car park and look in the bank and the basement, right? People just don't do that due diligence. And

Veronica Morgan: They've got to, because

Martin North: It makes such a huge difference. And you know, I've, I've had the opportunity of speaking to a number of people who've got again in high-rise developments where they've got cracks in the basements that have been there for quite some time. Nobody wants to talk about them. The reason is that as soon as they are actually highlighted are the same of flammable planning. As soon as flammable planning is highlighted, then the value through the floor. So everybody looks the other way and some are, can't be that serious when it might be. So if you are going to buy in high-rise, you've got to look beyond the apartments. You've got to look in the basement and you've got to ask the hard questions about flammable cladding and about structural issues. Now, the question I've got for you, Veronica is do the strata companies have an obligation to disclose when you ask this

Veronica Morgan: Is a very good question. And I don't know the actual obligation on that. I believe that the sales agent has an obligation, and I believe that the vendor has an obligation because it's in my view, it's under material fact. Now I could be proven by the letter of the law, perhaps I'm wrong. But my definition of material fact is as I understand it, as I apply, it is anything that would deter would cause a person to think twice about a buying the property and B the price of they're prepared to pay and absolutely phlegm. The presence of flammable cladding is one of those things. So the owner knows whether the buildings cloud or not, because there is a register and all buildings are, have a requirement to be on that register if they have it. So the owner knows there's in the agency group and certainly in new south Wales.

Veronica Morgan: Anyway, they're on the eighth sales agency agreement. There's a, there's a material fact clause in there that the owner is obliged to tell the agent. And once the agent knows the agent is obliged to tell prospective buyers. So forget the strata manager for a minute because their agency agreement is not with as a sales agency agreement. You know what I mean? In terms of law, I guess, with who's contracted with who they're just contracted to the owner's corporation to help them run the building. They're not, they're not a party to the sale of it. So it's, and you know, we know this ourselves and we look at a strata of reports. They're all got holes in them. And so we sort of list a whole bunch of questions that are raised for us. When we read through them, put those questions to our practices, to put them to the strata manager and the sales agent, probably half the time we get a strata manager come back saying, can't comment because you're not the owner.

Veronica Morgan: So then we have to backdoor it and say to the agent, well, can you find this out from the vendor, please now in a hot market? Unfortunately, a lot of vendors are saying, oh, no, I don't know anything about that. Or the agent just doesn't respond. And as a buyer, you've got to take the FOMO out and not hope for the best. You got to bloody not buy that property. If there's questions that you can't answer. And you also got to learn to understand it. It's not hard to work out what cladding looks like, and then go, well, okay, it's clad in something. It's either flammable or not flammable. It's gone try and find out which one of those two things. But if it's painted brick, it's obviously not clouded anything. You know what I mean? It's basic stuff. Really. If you, if people take responsibility for themselves, when they're actually looking at what they're buying,

Martin North: Right. But you made the interesting point about the register, right? So that register is not publicly available. Is it? No, it isn't. That's the problem. So there's no, there's no easy, obvious way to get disclosure, right. A hundred percent. And so you have to use your eyes. I absolutely agree with you. And I said that to a few people use your eyes, you know, clouding means you've got a sheet or something on the outside that goes probably over multiple over model properties. Right. Therefore if it's clad, you're on notice to ask the next question, which is what is the type of planning that's on the building. And then the next question is, how do I find out precisely the state of that clouding? Right? And the point I would make is, unfortunately, if you ask the agent and they give you a verbal reply, it's meaningless, right?

Martin North: You have to get something in writing in my view, because you need protection later, right? Because agents will tell you, well, what they, what they think you want to hear. Right? And in some cases they will tell you the truth. In some cases, they will tell you some of the truth. So it is really important to go through that process. And I, you know, I don't want to scare people because, you know, I, and I'm not saying never buy property because I actually think property is still a very good investment if you buy the right property in the right place at the right time. But there's a set process you must go through. There are questions you got to ask because otherwise, frankly, you know, you make more errors on the way in when you buy property than almost any other part of the journey.

Chris Bates: Well, I think the main thing is that the market is unregulated really. And so if you, even, if you think there is a legal case for you down the line, you should never rely on that as protection because you know, it, the whole process of actually getting that, you know, and going there and legally and lawyers and fighting and et cetera, I wouldn't rely on absolutely anything besides you really being confident that you know what you're doing and, you know, you're buying a quality asset. So if there's any doubt that he's these things collided or flammable, or even that type of apartment, I just would be avoiding that. You know? And so I think you've probably market. It's all about Bybee where it's all about. No, one's there to protect you. No, one's going to stand out for you. You know? And even if something goes wrong, it's all on you. And I think you've got to have that real high personal accountability because there in reality is if something does go wrong, there's very little to protect you,

Martin North: But you got to counter that with fear of missing out, right? The moment in many areas, people are really worried, worried about not being able to buy and therefore are cutting corners. And unfortunately this is precisely the time when you must take the processes seriously, you must make those inquiries do not get caught into the sort of the frothiness that's there at the moment. This is precisely the time to be doubly careful in my view.

Chris Bates: Oh, absolutely. I mean, you would say this Veronica, I mean, I'm sure that you're seeing a lot more busy roads going for big prices, you know, dodgy rhinos, lots of different things. A DA's not approved people buying without contract checks or building and pests, you know, there's you know, we've had clients in pretty much all those situations they bought without doing their due diligence, or they've not got the property because someone else hasn't done their due diligence, know what are you sort of saying? You know, it sends a defined logic, I guess, Veronica at the moment. Oh, absolutely.

Veronica Morgan: All of the above. I mean, it we've had a number of situations recently. I'm not sure if I mentioned this on the podcast or not before, but we started jokingly calling ourselves good days, probably under bidders because you know, like, you know, what are we doing here? We're not buying anything for, for a period of time there. And I'm quite serious. We were doing our evaluation on a number of different properties for clients. And we discover something that nobody else would have known one particular case. And I'm sure I've talked about this one, so I won't go on about it. But, you know, we discovered the parking wasn't approved and we notified the agent because it was like, well, you shouldn't be advertising as approved. Now. It was an interesting process. They went through to try to justify that they will continue to do so.

Veronica Morgan: But anyway, whilst counsel said, it's not approved the vendor. Solicitor said, oh, well, it's beyond the statute of limitations period of whatever. And I'm like, yeah, well that doesn't really help any buyer does it. So we did go for that. But obviously our client did meet, you know, did reach strict the upper limit in terms of their negotiations instructions to us. And, and that was with our guidance. Absolutely our encouragement. And of course, somebody else went and paid more and I'm pretty confident that person has no idea that that parking is not approved. And that's just one example of many. And, you know, we have to have that conversation with our clients to say, look, sometimes I feel like you're a bit disadvantaged, but that's, if you let FOMO runaway the reality is that at one point, yes, there's, that may be, maybe it's fine. Maybe there'll be fine. But what if it isn't, if it isn't one day they'll realize that they've paid too much for something that doesn't actually exist. And I don't want you to be in that position. So I'd rather you not buy that property or you only buy it. If you can sort of get it at a price that mitigates that risk,

Chris Bates: Joe cave, Kevin Martin, have you saying any initial outcomes or any areas that are really, you know, it's only been a month or so, I guess even not even that, but what are you saying? Right.

Martin North: It's a good question. So I run my mortgage stress surveys and the overall mortgage stress is at 41 point something percent, right. Which is as high as it's been. Now, there was a little bit of relief, like two or three months ago, but that relief is now reversing. And one of the factors that's creating the problem is the end of a job keeper. So we are seeing some households struggling with their cashflow. Remember I define stress as cashflow, right? And that means that this is not necessarily going to fall off a cliff tomorrow afternoon. It's a long slow grind. But just to remind you before we had COVID, the proportion of households was about 32% in mortgage stress. We're now at 41 point something percent, right now that's more 1.5 million households who are struggling with cash flows. Now, when you pass out about one third of them had some support through the last year, either by the way of interest relief from banks or from job keeper, that's all ended. And so they are actually finding it quite difficult. Others are definitely back in work and are actually not, I'm not finding it a problem, but unfortunately, a lot of the pressure on households raise now very much in those high growth corridors in around our major cities like Campbelltown in, in, in, in, in, in Sydney or narrow Warren in Victoria in sorry, in outside Melbourne,

Veronica Morgan: I always loved the term high growth corridors because you know, agents use it and spruikers use it to say that this is a high growth area, so you definitely should be investing here. But when you say it, what do you mean by that?

Martin North: What I mean by high growth corridors is high numbers of new construction is currently going on a lot. We'll be including the knocking down of all places and putting up you know apartments on what used to be individual plots or the other thing I see is often subdivision where you have now three villas. If we notice the term villas now popped back in, you know, it's, it's one that people use a lot and I was a small townhouse, right? In some cases, two level, but you know, the point is it's very small, but what we're seeing is the proliferation of more and more high density develops on the outskirts of town, some brand new, some redevelopment of areas like Arizona point cook, for example, down in, in outside of Melbourne, which is a combination of new development versus other development, which is redevelopment of, of areas that were built previously.

Martin North: Now that's what I mean by high growth is high growth in terms of numbers of people going there. So a lot of people are migrating a lot of concentration, often of first-generation Australians. So people who have moved from other countries we often see that there, and we often see families with quite large numbers of kids and those, so that sort of stuff is what I'm told. I'm not talking about value growth. In fact, I would say that a high growth corridors are actually going backwards. Again, if you look at houses in those areas, they are still significantly down from where they were in 2017. And unfortunately a lot of people there are in high degrees of mortgage stress, they're struggling to make those mortgage repayments. They often took a significantly large mortgage out to get by the property, which of course when it's priced as new is always what, 15 to 20% above probably true value.

Martin North: And then of course the value goes down when you try and sell it later. Well, guess what, you're now competing with that new property being built down the road, which is still overpriced. So I mean, that cycle is something that people don't get. So when I map this, I see those high growth corridors, very much being a significant concentration in terms of mortgage stress or the other one of course is close into town. So the high rise sector, but if the closer into town Melbourne postcode, 3000 and the Sydney postcode 2000, both have high mortgage stress. Another one in, in new south Wales. Cannington that area around there. Again, high levels of stress. So it's pockets it, you know, it's not everywhere, but it's still significant. And going back to where you ask the question, Chris, it does come back to job keeper adjustments, but also the broader economic curve situation.

Martin North: We have an underemployment for me is the most critical factor here. In other words, people don't have the hours that they want to have. So they might be working a few hours a week and therefore aren't classified as unemployed. They are absolutely under employed and not generating the hours to generate the income, to pay the mortgage and everything else. They often have multiple jobs, several part-time jobs. It's, I mean, it's a messy situation at the moment, unfortunately, and I think it's going to get worse over the next few months. If you like, what you're hearing here,

Veronica Morgan: Please share this episode with others, you feel would benefit. And while you're at it, why not leave us an iTunes review five stars, please. Every review helps make it easier for other people to find us and hear what our amazing guests have to say. We love hearing your questions and we're planning more listener Q and a episodes. Please send your questions in. You can send them via the website, which is the elephant in the room.com.edu or directly via email to questions@theelephantintheroom.com.edu. You mentioned Paddington that sort of surprises me because it's, there's not a huge amount of new development there. And it's very much, you know, old money Eastern suburbs in many respects what's going on there. Is that an anomaly in terms of where it's located or what's the,

Martin North: The, sorry, I'll give you another little sort of thumbnail case in the conversation. Again, I got permission to, to relay this. So this is somebody who bought there just over a decade ago, right. And basically bought a property which had it's a house, right? And the house basically has a separate term self-contained flat, which is let out right now. The problem there is that that self-contained flat is now not being let out as much as it used to. Again, it was an Airbnb things, cause it was quite convenient, but they can't do Airbnb. They just can't get the interest. So, so the income drops dramatically by about half from that flat. Now that flat was actually partly paying for the overall mortgage on, on the property. The, the person who's actually in the academic sector was working full time in academia. He was made redundant about a year ago and is basically doing part-time work wherever you can find it, but his income dropped by about 60%.

Martin North: Now the result of all that is the cashflow in is not sufficient to cover all the costs. And therefore that was, that's a mortgage stress situation now sitting on capital value, great, but still struggling to repay the mortgage. And in fact, there's a refinancing thing going on at the moment to try and extend the duration of the mortgage from about 20 years to 35 years, to try and actually reduce the the, you know, the outgoings because there's no short term way back because you know, the, the academic sector is, is gonna continue to catch a cold for a long, long time. Now, you know, incomes, there were pretty good if you were in full-time tenured you know positions, but if you weren't, then it was always a bit dodgy and it's now really, really dodgy. So that's another example. And, and again, I'm seeing that, you know, played out again and again and again.

Martin North: Right. so yeah, you gotta, you gotta sort of look at individuals because you know, the overall metric for stress in the practice area is quite a lot lower than those outer growth areas. But nevertheless, there are stories like that, which, which come home. And that's what I want to sort of underscore to people today that you've got to look at individual people and their stories to really understand what's going on. You can't just talk generically about what's happening to prices or what's happening to incomes or employment, right? Every person's situation is different, but there are a lot of people who are really hurting at the moment. So,

Chris Bates: I mean, that's an interesting one Paddington near because you're in an area where is inherent restriction on supply, but also there's an inherent under supply because ultimately lots of people in Sydney would love a terrorist in Paddington, let's say because it's a lifestyle benefits and that's never going to change. And so yes, there will still be people scattered across the city at all different demographics in all different locations who situation is dramatically, no, nowhere near as good as it was a couple of years ago. And they're going through debt stress problem as if it's in somewhere like Paddington, the demand is so much more than supply. So even if there is a increase of supply looking to sell, there's no way more demand than the increase. And so th that person, their yes, their debt stress, and they're worrying about paying the mortgage and they really what they also do. They don't want to sell that

Martin North: Place. That's exactly right. I mean, that was part of the discussion we had, which was, well, you know, should you actually take advantage of the fact that prices are now moving up again and, you know, get out and, and basically solve your financial problem, but he didn't want to do that because they think that's a, long-term good value bet. So you've got this, this amazing city. That's why they're refinancing, right? Because they're basically refinancing with, with some of the equity growth. That's been there to be give them a cushion over the next two or three years to be able to get through. But, you know, that's, there's a really interesting observation there about, well, yeah, you can trade off capital growth for cashflow to up to a point, but there's a point where you gotta ask the question, is that still a sense of Australia? True.

Veronica Morgan: And you've got to have the capital growth in the first place, but I think what you mentioned something earlier, you drew the distinction between affordability versus paying off the capital. And I think that's a very interesting point because you know, I heard Alan Cola, he was on Q and a, a couple of weeks back and, and you know, it was, they were talking about unaffordability and housing affordability. And the rest of you said, it said houses affordable. That's the problem. The people can afford them. The repayments, you know, obviously they did the deposit is different for a first home buyer, but once you're in that, that is the problem at the moment that, that writes us our load that makes them affordable. But yeah, that is very much that, that differential. So in your situation like your Paddington people there, you know, if they extend their refinance, they add another 10 years or whatever to their mortgage you know, and maybe they go into this only so that they can tie. So could the ride this wave out, ultimately, they're still going to end up with this big debt debt balloon at some point, right?

Martin North: You're right. And they are going interest only, and the banks are happy, right? Whereas two or three years ago, I remember the APA and the banks were interested. Only men have a problem, you know, financial stability, risks general coin point here, of course, in the last budget, which was released last week. We have basically as a country going interest only, right. You know, w w we are going to be paying 131 billion of interest over the next 10 years, assuming interest rates stay at what, 1.7%, right? There's no story in the out years in the budget of paying off the capital that we've actually accumulated right now, I would argue that whilst you, you can, you know, don't draw too many parallels between the household budget and the country budget. The fact that now nobody's worrying about repaying, the capital is a very concerning situation because the capital ultimately has to be repaid now. Okay. You could argue maybe if you've got a property, well,

Veronica Morgan: We were just getting used to living with just massive debt over servicing it. Yeah. There's,

Martin North: There's a really interesting observation. There are. We actually, ultimately really, although we are owning a property with a mortgage, actually renting a property, are we never, ever going to pay it off? And maybe the concept of, you know, getting a mortgage and paying it down quickly, which of course is the old strategy. That was what I did years ago. I mean, I hated having the mortgage and I want to get rid of it since I can. But these days with interest rates so low, you know, is it the best strategy to say, well, you know, I'm just going to sit on that capital debt. I don't care. You know, the capital will look after itself. I'll just service the interest until of course you realize there's one catch and that is interest rates, right? Interest rates are ultra low at the moment. And the question then is how long will they stay ultra low?

Martin North: Will they start to rise? When will they rise? The forward yield curve is already suggesting prices for, for, for money will go higher. And that could actually translate to higher mortgage rates later. Now, if, if mortgage rates doubled from where we currently are, mortgage stress goes about 50%, that's a big deal, right? So we're ultra sensitized now to what interest rates do. Now, the argument on one side is, whereas a bank will never raise rates because they know if they did, it would cause an absolute mayhem catastrophe, right? The other side of it is they might be forced to because the international financial markets, the fed and everybody else will be driving rates up and we can't afford not to follow if they do that. Again, I always say to people, okay. Right. So really, really low that doesn't necessarily mean you should basically borrow 15% more than you did last year, simply because rates are lower because you still got to ask. So the question about how are you going to deal with this downstream? Now, if your strategy is never to repay the capital, well, that's one strategy, but just think it through, there are some risks of that. If the other strategy is to pay down the capital as quickly as you can that's a different strategy. Those two things are polar opposites in terms of thinking it through. And again, people often don't think this through.

Chris Bates: Yeah. So admin rights do drive behavior. So what we're saying definitely a shift in mentality or propensity to sort of desire to take on debt or and people who are a bit more conservative, you know, potentially changing their view and saying, well, rates are low. They're going to likely stay low. I at least get for the next three or four years, a really good fixed rate. Maybe I should just take on that debt. So that's definitely shifting, but I think Carlos Cacho was one of our episodes recently call out a really good point. A lot of say the bigger mortgages they are taking the view that when rates are low the need to pay it off is lower. Because, you know, opportunity cost of, you know, burning cash on interest. So why are we thinking about sort of paying this off, because at some point you can always just sell that property and then you can downsize.

Chris Bates: So what you're ultimately trying to do is build a net wealth, I guess, within that property. And then the actual paying it off is through sale. And I don't think that's really played out, but I can already say it. It is. And so that's encouraging more people to take on more debts and whether they should, or shouldn't is a side point, but if that's happening in the market, that's what you get creating more demand. And I think you made a really good point as well, mountain way. You spoke about interest only on homes. Absolutely. It's been really difficult to do that probably for four or five or six years. And you know, when the Afra sort of came in with interest Aileen limits, they sort of really made it hard to get interested in the, on home loans.

Chris Bates: And it still is like that. But if we did shift to a point like it was in 2014, especially with these responsible lending changes where you can get interested in the, on home loans. And you can do that at sub 3% interest rates that would send an absolute rocket up demand because people would take that view, which I was speaking about. So I think it's a really exciting thing to watch the moments, if we can start to get interest only on home loans it's only going to end in sort of one thing, which yeah, it's potentially likely to happen.

Martin North: Well, that's one of the reasons why I'm forecasting price rises from this point, right? I think the lending standards will be eased further. I'm already seeing evidence from my surveys of more people being able to get those interest on the loans. And in fact, the banks in some cases have recommended people switch to interest only loans to reduce their repayments, right? So the banks are not actually now resisting that requests sometimes. Not always, but sometimes, right. So it is easier. And I think more so down the track, but it's worth reflecting on this right. In Japan, there's a 100 year mortgage, right. Intergenerational mortgage, essentially. So, you know, and just pause and think about that. What we're actually saying is that it's more and more like renting, right? So when you rent, what you're doing is you're basically paying to live in a place, right.

Martin North: A hundred year mortgage basically says you're paying to live in a place. And so we're seeing this sort of interesting bifurcation reversing where effectively, whether you've got a mortgage or whether you haven't got a mortgage in what you're doing is fairly similar behavior. And hopefully if you've got the mortgage, you're still accumulating some capital growth, assuming price is gone rising, which of course is an interesting question because of course, capital growth is linked to interest rates falling while they've, they've pretty much fallen to, as far as they're going to go lending standards, are they going to get loose up? Probably they will. So there's a little bit of upside there. International migration, probably lower head rather than what we've been used to. That's going to be dampening in terms of demand,

Veronica Morgan: Scott, negative population growth. Is that why they go into a hundred years? Exactly.

Martin North: Right. And they'd been quantitative easing the longest and they got negative interest rates.

Chris Bates: I think loan sends a really interesting one Martin because that reduces your repayments. So if you have a $20 million loan and you're paying it off over 20 years, you're a payments X. But if you go 30 years, which is what most loans are set up, it's much lower. And if we start to see, you know, 40 or 45 or even 35 year loans become the norm that would absolutely allow people to have confidence to borrow more money. And

Martin North: The banks would love you for that, right? The book, because basically the banks don't want you to repay the capital. The banks want you to serve as the loan. They want your cash flow. Right. And I keep saying to people, people understand you are basically reduced to a series of cash flows. That's how the bank thinks about you. Right. As long as you can go on servicing the loan, it can be for 20 years, 40 years, 60 years, they don't care. Right. All they want is your money. Yeah, exactly.

Chris Bates: Yeah. And that's the thing, I mean, and if, if this whole responsible lending does happen, you know, that means you've got any extra information around that. It's all gone a bit quiet and what I can say it was all meant to happen in March, April, or at least it's coming

Martin North: Back, it's coming back into parliament at some point. There is significant backbench resistance to it. The way the government is positioning, it is of course has covered recovery, right. But of course now, you know, the booming, the booming lending rather suggest that there's a bit of a sort of sour flavor. There's a lot of resistance from and consumer groups in terms of trying to lobby for it, what the way they're doing it is they're trying to roll it into SME lending and trying to convince the backbenchers that the reason you do is to enable more lending for SMEs. Despite the fact that of course, SMEs are not within the responsible lending obligations directly. So, so there's a lot of noise, a lot of you know, back ground briefings going on at the moment. I think it will come back into parliament probably end of may, beginning of June.

Martin North: But what will happen at that point is interesting. And remember that, you know, prices have shot up dramatically since they thought about it. Lending has been growing much faster, more recently at the banks. So you wonder whether in fact it's you know, is it really even worth thinking about my theory has always been responsible lending was more about the banks trying to avoid class actions from past history, right? So that's the reason why they want it eroded. And I would argue that there's probably somewhere in the dim and distant past, there was a bit of an agreement between the banks and the government that if the banks help people through COVID, the government would actually find a way of disabling responsible lending. So that's, that's my theory. I can't prove it, but I, I have a feeling that could be the case, oh, I love it. A conspiracy.

Speaker 5: That's why you're not get along.

Chris Bates: The other tax, I guess, at the moment, which you happened. I don't know, never had to say at last week, but I guess it did actually happen last week. I mean or even this week with state government in Victoria, increasing stamp duty I think this is a really interesting topic because in new south Wales, we're trying to, you know, potentially the treasury wants to move from stamp duty to land tax, I guess, or hour an annual stamp duty, I guess. And Victoria they're increasing stamp duty on the for investors, but also for, you know, expensive properties over 2 million. So what's your view on that and how it's, I guess, different to what we're trying to do in new south Wales?

Martin North: You know, I've got the view of having the view for a long time, that stamp duty as a highly distortionary tax. But it's one that the states love because of course it's money up front, which they that they can then, and, you know, in new south Wales, we're up to eight, 8 billion a year or something. That's a huge number, right. And Victoria is not far behind. I think it's very interesting that you saw her is basically talking about lifting it and they're arguing they need to do it because of the significant debt that they've incurred because of COVID. Right. So that's, that's, that's the logic in new south Wales that you've got the choice, I think, as I understand it. So you can basically either do land tax no, as you pay so much a year for the duration of the property, or, you know, they talk about talking about it, right.

Martin North: Or you, you, you pay it up front. Now there's an interesting question because of course, if you own the property just for a few years, then paying land tax might be good because you end up paying less. Right. Whereas if you actually own the property for 20, 30 years, you end up probably paying a lot more and remember this folks, they can always put the land tax write up later. Right. So it might come in very low to start with and it might look a good deal, but later then potentially you might find that they charge you a bit more. Right. Also

Veronica Morgan: Once the property is converted from one-off stamp duty to ongoing Lange tax, it can never revert.

Martin North: Exactly. Yeah. And that makes an interesting question about what about the best person who buys it. Right. And then the other point there is with stamp duty while yeah. You know, you've got to pay it, so you sort of in, can incorporate it. And in some cases it's incorporated into the mortgage transaction. I thought

Chris Bates: I didn't actually realize that Veronica said they're part of their policy, is that if you, for example I buy a property, you know, in 2022. And I decided to go for the annual, when I try to sell that, that person doesn't have a choice, whether to go stamp duty or annual again,

Veronica Morgan: That's the plan, ah,

Martin North: How they transition it'll backdoor route once. So once it's, once it's flagged as you know, land tax, then it's always going to be Lantech. Well,

Veronica Morgan: They're wanting to transition away from stamp duty that they don't like it, but it's the very contentious how you do that is very problematic. So this is a way to basically mean yet there's no reversing.

Martin North: And on the other point there, of course, is the government you know, is going to want to manage this over a period of time because otherwise its cashflow gets, gets completely destroyed for a few years, right? Because if, if stamp duty disappears then so, so what they're trying to do is cleverly right? Ride, the volume of transactions are right. Grab the stamp duty on the way through. And then they'll begin to sort of steer people towards land tax and over a period of time migrate to it. So it's a long slow burn, but I think people should be very, very cautious about the switch because I do think there are some strings attached to it, which nobody really wants to talk about. I agree.

Chris Bates: Just process rising. Yes. I mean, that's the, ultimately the state government said as part of the pitch is that they think transaction to increase by 50%. And every time a transaction happens, generally, it's the person buying. It has more debt than the person selling. And so what you're doing usually yet, unless it's you know, most of the time, so what you're doing every time that happens, you creating more debt, you creating more loans, you're creating and that debt is what pushes up prices. So whether you an investor sells their apartment and then a first home buyer buys it with a 90% loan then the investor takes that profit and potentially does something else. And so through those transactions, you create momentum in the market and that's ultimately what will be pushing prices up. So a lot of people thinking, oh, you know, it's a great, I don't have to pay 5% stamp duty. Well, I, I I'd probably say the prices will rise more than 5% pretty quickly to offset, you know, that 5% savings

Martin North: Marin, my land tax is relate to the value of the land. If prices continue to rise, guess what happens? Yes. That's a good point.

Veronica Morgan: The thing is with land tax, you know, you're the office, sorry, the land titles office has a land value attached to all parcels of land, the state, right. And your rates. So your council rates are determined according to the land value. So, but how it see how that works is it's a proportion of all the land value in that council area. And so if right, if you land value goes, that doesn't mean your rates go up, unless yours goes up proportionally, disproportionately to somebody else's right. But certainly land tax is not, it's not capped at a bucket. There's not a bucket of land tax centers, proportioned out according to whatever the land is worth. And I hate land tax economists love it. They think that it's a fair tax. I fricking hate it. And I certainly hate it the way it's the way it's currently applied in new south Wales. So potentially if it was evened out amongst every single residential land holder and it was, it was, you know, it was a very even measure. Perhaps I would agree with it, but even their transition is not, it doesn't fulfill that requirement in my book.

Martin North: I, I, I tend to agree. I think it's a bit akin to the toll charges on the Harbor bridge. Right. Which was, I remember it, remember it was a temporary charge when it was first built. Right. Well, except that it's still there and it's gone up, right. I think that's a problem with land tax. Yeah.

Veronica Morgan: It's, I mean, they need money to run the state, you know, and property is just far too tempted. Exactly. Well,

Chris Bates: Speaking about government, you know, the next one is probably the budget, which is Tama you're on again, mountain. I mean it seems like they really want to keep on encouraging home builder a little bit. I mean, but mainly it's a lot of first-time buyers with, you know, 2% deposits, you know 

Martin North: Single family is mostly, if you look at the price range targeting units, right. And that's really more aligned to helping out the high-rise building mates who are having great devotees selling them in my view. Yeah,

Chris Bates: Exactly. Right. I mean, that's the price restriction forces certain rate that regional law it's you know, it's apartment in the city. Really.

Martin North: Yeah. I think it's really important that we talk about the need for social housing and we need affordable housing for people who actually currently can't get access to housing. We need that. I'm not sure that what the budget is proposing is actually helping on either of those two things. So, and the problem I have is that the the whole strategy seems to be more about, let's just drive the housing flywheel a bit more, get a few more people in, keep the Ponzi scene going because we need to continue the lending and we need the you know, the growth and the wealth effect. There is very little strategic thought in the budget, a lot of money being wasted on things that are, you know, good, but not necessarily strategically good. And a lot of stuff that in my view could have been done and should have been done. And wasn't done. I think we'll look back on this as a trillion dollars of frankly, mostly wasted money because we won't have a legacy beyond it. And that's my real problem with the budget and the way that it's shown.

Chris Bates: Well, I think it's going to be a big issue. Housing affordability absolutely is already, you know, cause the situation, you know, wealth effect, you know, certain people will do well. Some people don't do well. Basically people who've got property versus good property versus, you know who have, who want to enter the market. A lot of first-time buyers in the next generation absolutely will be getting upset with process running and that discontent will lead to a bigger pool every year and that, you know, become a voting issue and social unrest, et cetera. And so I think the government was more careful now is that they're not addressing it with a sort of slip stack sort of policies. Hence why labor went with negative gearing a couple of years ago. Right. so I think you're going to see this as a big sort of election thing in a couple of years,

Martin North: Problem is you've got, you've got this, what I call the K shaped economy, right? You've got a proportion of people who've done really well and are doing really well. Their prices of their properties are increasing they're back employed and doing really well. You've got another sector of the economy. About a third of them are really struggling. Their cash flows are very limited. They can't get into the property market that, you know, and unfortunately just the pure mathematics of how the election system works. You only need a proportion of the, of the population to vote for you. Right? And there are enough in the upper leg of the Quay to actually get them reelected. So I regard the budget is predominantly an edifice for reelection rather than strategic, rather than a strategic thinking for the long-term future and prosperity of Australia,

Veronica Morgan: Casey point, nothing for the environment. Hello. I mean really renewables environment. I don't think it was even think it was mentioned in there now, Martin, have you got a property Dumbo for us? I will be talking about a few of them. And of course we are kind to our Dumbos because we can learn from them. You've got another one, any other examples?

Martin North: So this is a very interesting one. It's actually another of my one-to-one conversations and basically people went to view a particular property down in regional new south Wales. It was actually up in Austin mere prices. They have gone up more than 20% in the last year. So it's a very, very hot market, right? So they basically went and saw this property and basically put an offer in and then realized that they actually putting an offer in, on the property next door, which was also for sale.

Veronica Morgan: And they do that and

Martin North: They didn't notice until the searches came back and the services, I said, well, hang on a moment, you say four bedrooms, this has got three bedrooms, are you sure what's going on?

Veronica Morgan: But no, that I accepted it so easily. So when you say they put an offer in, did they actually sign a contract?

Martin North: The contract was actually assigned an exchange, but they've unwounded so there was calling off period. Yeah, exactly. Right. So, so, so moral of the story is folks, when you actually rush in and think, oh, I've got to get this property right. Make quite sure, make quite sure that you know, that you're buying the property that you think you're right. Because the problem there was that the numbering in the street was not linear and uniform. Right. And so they assumed it was number X when it was number Y despite the fact that it was clearly, you know, on the, on the, on the poster as it were. Right. So, so there's a, it sounds weird. Right. But I just thought that was, that was ideal for the podcast.

Veronica Morgan: That's fantastic because that is basically just like you're so I can imagine you're so uptight and worried and FOMO crazed that you just

Speaker 6: Rush our trash

Veronica Morgan: Doesn't even occur to you that could possibly even happen. It must've been the same agent selling the boat.

Martin North: Well, it's the same agent. Exactly. Right. And in fact, the agent didn't accompany them around the property. Right. So, so basically, so basically, you know, that they came back and said, well, we've seen this property it's number X. Right. And we want to make an offer. Right. And so the agent of gray, you know wow. That's a good price. Yeah, exactly. So that was one of the reasons why you know, the price was what it was, cause it was only a three bed. Right. So basically it was an offer and a four bed, but it was a three bed. Right. So it was a really, really object lesson in, you know, getting your ducks in a row, stopping and thinking, just make quite sure that you are actually bidding what you think you're bidding. Right. And

Speaker 5: Rather, so there you go. But luckily

Martin North: They got it all unscrambled and they actually found another property just down the road. So, but it, it w it was one of those things they told me about it and I just, I couldn't stop laughing. Oh, that's fantastic.

Chris Bates: I don't know what does, I mean, these are the things, the things like this do happen and shouldn't happen, but they do happen in reality. So as a cracker Mosman and also, I really appreciate you coming on always great chats. Love your data and look forward to having you on in a few

Martin North: Months time. Great. And thanks very much folks. And I really enjoy talking with you guys because I think we can bring a, a dose of reality of the property market. And if we can, then that's good for everybody. Absolutely.

Speaker 6: We want to

Veronica Morgan: Make you a better elephant rider. And this week's elephant rider training is I think,

Chris Bates: You know, one real good learning for us or to embed in our sort of financial management, I guess is to always be looking at your mortgage and be looking at us, not just as a tool that you got to pay it off as fast as you can, but using it as a tool that can help you and give you more peace of mind and less stress and and actually be constantly be sort of fiddling with it, I guess, to make sure that you're the best outcomes. So yes, most people will say, I can refinance it and get a better rate, which absolutely the pricing on mortgages in 2020 or 2021 versus the pricing of mortgages say five years ago, it was probably anywhere from 60 to 80 basis points cheaper than what you would have got a mortgage five years ago. So if you haven't refinanced in the last five years, if you go and look at other banks, you probably save yourself, you know, 0.6 or 0.8% a lot of money.

Chris Bates: So yeah, you should do it for that reason, but the main reason you should always be doing it is it's always a risk management strategy and protecting yourself. So one thing Martin spoke about is lowering your payments by extending your loan term. For me, that's actually a really good strategy because let's say you had a loan that was 30 years, and now it's down to 20 years by just going back to 30 years, what you're doing is reducing your, your actual, outgoing, your monthly commitment, which is reducing your if something happened to your situation, you have less commitments, but doesn't mean you don't pay off your mortgage just as fast. You then use your offset account. And you keep on building up money in your offset. Cassie still paid off just as fast, but you do it by having a low repayment and using your offset account.

Chris Bates: So there's other reasons why you want to refinance not just around, right. It's also a risk management strategy. Like if you've got equity in the property, you may be able to pull that equity out, it's called a cash release and just have that money sitting in the offset account. And you may not even use it. That's a risk management strategy in itself and not just about getting a better rate. So mortgage is really every couple of years, you should just be sort of playing around with it. Can you lower your repayments? Can you release equity? And can you get yourself a better rate?

Veronica Morgan: Are there age limits on doing this

Chris Bates: Sometimes in some banks? Yes. But you'd be surprised that, you know, even in your late fifties and sixties, you can potentially get very low, long loan terms, but we're doing one at the moment, you know, he's a fair whack older than her. And you know, because she's a bit younger than the bank is happy to do a really long line to and these are in their fifties. So yeah, you should be able to potentially do it. They are, you know, you want to see LVRs to be a lot lower, obviously when your Mo are older, there needs to be an exit strategy. That's clearly documented, et cetera which might be paying out super or selling an investment or et cetera. So it's more difficult, but banks being banks are probably still one of them.

Veronica Morgan: And do people often refinance with their existing bank or is it that at that point that they really shop around

Chris Bates: That, wait, we prefer clients just to state their existing bank. You know, you've got all your banking setup. And so if the current bank is willing to come to the party, offer you a much better, right. The fixed rates are good. Then yeah, why don't just stay? The problem is at the moment or just generally banks will never give you as good a pricing as a new lender would, that will give one shot really. And so what will you find is that you'll be able to get a much better deal by refinancing. Then if you asked a better deal at the bank you're at now, if you, for example, get that better deal and go back to your existing bank and say, look, unless you match it, I'm going to leave sometimes that will work, but you have to literally get a better deal to get the bank, to give you a better rate, which is kind of what they call the loyalty texts.

Chris Bates: You asked for a better deal that I want to do it until you say you're leaving. And then they'll say, actually, I'll give you a better deal. The other thing is they usually cost around a thousand dollars, probably less than that to refinance bank to bank, but just think a thousand dollars. But all the banks are now offering cash back basically, which might be two, three or $4,000. And so it's really free to refinance. Plus you get a thousand or $2,000 in your pocket for the pain. Plus you get yourself a better rate and plus you can do your cash out, extend line times, et cetera. So at the moment, a lot of people are just swapping

Veronica Morgan: Banks. It's so ridiculous. You can I just go to my bank, look up, pay me to stay.

Chris Bates: It's interesting. Some of the banks are actually doing that. So they're actually giving you cash back without even refinancing because they know you can get cash back elsewhere. The banks really shot themselves in the foot with cash back. I and Zed came out and said, oh, we're so desperate to grow our loan book. We were, they were getting smashed at their show holders you know, meetings and that their loan books falling, they're falling behind CBA and Westpac, et cetera. And the processes that were losing market share with brokers. And so we're getting so desperate. So they said, oh, let's just offer this cashback. And this amazing two year fixed rate. And when they did that, absolutely flooded their business because the whole broker community said, what the hell is this we're gonna? And then I went to all their customers and said, look, we can do this deal at exit.

Chris Bates: I ended up flooded that business and that really worked. They actually solved their loan book problem. The problem is all the other banks say, well, hang on a sec. If that works for ANZ, we're going to do this. And then all the other banks started offering cash back. And now it's given that all the banks, if they're going to want to, when you as a refinance, they've got to offer cash back. So I ended that it's just shot all of them in the in the foot because cashback really eats into their profits. They've got off a really good, right? But now they go to pie too. When you, as a customer, plus all the marketing and brokers, et cetera. So I don't know if the banks there might look like they're growing their loan books, but they're nowhere near as profitable as their existing customer. Please join us for our next episode. We